Getting money to companies is the challenge of today, both to bridge their lack of liquidity through the coronavirus crisis and to strengthen the economic recovery to follow.
Most of the debate is focused on funding businesses through loans and other debt. European governments and regulators should also act urgently to ensure that companies have easy access to equity financing and that equity markets are robust enough to support the European economy.
Debt is effective because it reaches companies quickly and effectively, but it cannot be the only tool. It could generate side-effects: more debt means a worsening of companies’ credit rating, and over time this will dent their ability to obtain new funding. After the crisis has passed, there is likely to be a reckoning for indebted companies.
Companies need patient capital to start planning the future without the burden of too much leverage. The solution is equity. From the smallest shop to the largest listed corporations, raising equity is the right tool to see them through the crisis without impacting on their ability to fund themselves in the future.
This is why it is essential that well-co-ordinated measures are enacted simply and quickly, to allow for more deals to be done in time for European companies to start planning their future investments.
We must simplify companies’ access to this financing. National laws should provide for all companies to be able to raise up to 20 per cent of their capital without needing approval by shareholder meeting and regardless of what is included in their bylaws.
For companies listed on regulated markets, no prospectus should be necessary. Information regarding the capital raising should be made available through well-structured press releases. Listing rules and reviewing procedures should be harmonised, streamlined and made mandatory at European level. No regulatory arbitrage should be possible.
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We should also promote the development of investors in smaller companies through specifically allocated European funding and by allowing tax benefits at the country level. The notion of state aid must be modified so that it does not apply to investments in companies that are private or listed with a market value below €1bn.
People should be encouraged to invest in long-term equity funds in any way possible. The European Investment Fund, which channels finance to small businesses, should streamline its procedures, speed up its approval process and dedicate resources not only to private enterprises but also to securities issued by listed small and mid-caps.
Certain regulations and taxes that have been damaging for the market should be removed, including parts of the Europe-wide Mifid II regulatory regime, such as the infamous and pointless unbundling of research. We should scrap the need for time-consuming consultations, and damaging taxes such as those on financial transactions, which have been implemented in only two countries.
We must protect and help the European equity markets and their key players, including those active investors that traditionally focus also on smaller companies. Specific initiatives could include tax benefits on research regarding small and medium caps, both for the broker and for the issuer in the case of research paid for by the company.
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Mifid II should be simplified for smaller active investors with less than €5bn in assets under management. Large passive managers should contribute to the cost of producing research that they benefit from indirectly.
There need to be changes to venues, too. European stock exchanges should implement cross-market trading halts similar to the ones in place in the US, to protect investors during severe market declines. The quasi-monopolistic cost of data charged by the exchanges should be regulated; pricing behaviours by market participants that favour large investors and companies should be forbidden; and some of the regulation that has made equity sales and trading uneconomical for most brokers should be reviewed.
We should devise ways for public entities to act as investors in companies’ capital raisings, with instruments such as redeemable equity, which can be reimbursed by the company or entrepreneur when feasible over a long period of time.
Some of these initiatives can be taken quickly at national level. Some of them require a bold approach by the European Commission, such as cancelling the recently implemented research unbundling, and some of them will require more time.
There is not much time for discussion. It is self-evident that the need for equity will increase quickly and that the current market infrastructure is too fragile to support companies when they really need it.
Andrea Vismara is chief executive of Equita Group, an independent Italian investment bank. He wrote this article in conjunction with Stefano Caselli, vice-rector for international affairs at Bocconi university